North Carolina Got It Right on Unemployment Benefits

Unemployment in the Tar Heel State dropped by 17% in the second half of 2013 after extended benefits expired.

A year ago, North Carolina became the first state in the nation to exit the federal government's extended-benefits program for the unemployed. Facing the prospect of job-killing hikes in payroll taxes to pay back Washington, Gov.
Pat McCrory
and the state legislature instead reduced the amount and duration of unemployment-insurance benefits, which had been higher in North Carolina than in most states. As a result the state lost its eligibility to participate in the extended-benefits program on July 1, 2013.

National media and liberal activists pounced. Citing the decision and several other "outrages" by the state's first Republican-led government since Reconstruction—such as adopting a pro-growth flat tax, clearing out the state's regulatory thicket, and rejecting ObamaCare's Medicaid expansion—left-wing critics subjected the Tar Heel State to months of invective and ridicule.

Within the state, the so-called Moral Monday movement drew thousands of protesters to the capital on a nearly weekly basis. Hundreds of arrests were made for violating the rules of the state's Legislative Building. Outside the state, liberal media outlets excoriated North Carolina for ending extended benefits. New York Times columnist
Paul Krugman
called it a "war on the unemployed." Even some conservative columnists and policy analysts criticized the decision as unwise and inconsistent with the principles of their new "reform conservatism" movement.

An employee at Siemens Energy Hub in Charlotte, N.C.
Associated Press

North Carolina didn't descend into the Dickensian nightmare critics predicted. For the last six months of 2013, it was the only state where jobless recipients weren't eligible for extended benefits. Yet during that period North Carolina had one of the nation's largest improvements in labor-market performance and overall economic growth.

According to the U.S. Bureau of Labor Statistics, the number of payroll jobs in North Carolina rose by 1.5% in the second half of 2013, compared with a 0.8% rise for the nation as a whole. Total unemployment in the state dropped by 17%, compared with the national average drop of 12%. The state's official unemployment rate fell to 6.9% in December 2013 from 8.3% in June, while the nationwide rate fell by eight-tenths of a point to 6.7%.

As North Carolina began beating the national average month after month, defenders of the extended-benefits program said it was all a mirage. They said discouraged North Carolinians were simply dropping out of the labor force, not being nudged by a loss of benefits into jobs they might not otherwise have taken.

While North Carolina did experience a significant drop in labor-force participation, the trend began in February 2013 and was evident in a number of other Southeastern states. Unless you factor in time travel and massive cross-border unemployment-insurance fraud, it was impossible for North Carolina's exit from extended benefits in July to have caused the phenomenon.

More important, broader measures confirmed that North Carolina's labor-market gains after leaving the extended-benefits program weren't statistical quirks. In addition to the standard unemployment rate released every month (U-3), BLS computes annual averages for unemployment rates that include discouraged workers (U-4), all other marginally attached workers who have stopped looking for jobs (U-5), and people working part time who would rather have full-time jobs (U-6). By each measure, North Carolina still experienced one of the nation's largest drops in unemployment.

Furthermore, the decline in North Carolina's labor force didn't last. By early 2014, it had bottomed out and begun to rise. As of May, the most recent month of BLS data available, North Carolina's labor force is down only 0.04% from June 2013. During the same 11-month period, the nation's labor force dropped 0.1%.

North Carolina has also continued to add jobs at a healthy clip. According to BLS data, from June 2013 to May 2014, the state's employment-population ratio—which takes both labor-force participation and population trends into account—rose at a rate three times the national average.

Still not convinced that leaving the extended-benefits program encouraged both job creation and job acceptance? As of Jan. 1, 2014, the extended-benefits program expired nationwide. Yet there has been no sudden exodus of discouraged workers to the fringes of the national economy. Both job creation and household employment are up. The nation's employment-population ratio was 58.9% in May, up from 58.6% in December. The labor-market effects of reforming unemployment insurance may not be massive. But they certainly don't appear to be negative.

Left-leaning economists may still cling to their demand-side popguns and Keynesian religion. But here in the Tar Heel State, the governor and state legislature have decided to promote growth and opportunity by reducing and reforming taxes, streamlining regulation and improving public education and infrastructure. Given the state's impressive economic growth rate in 2013—4.2% in total GDP and 4.9% in private GDP, both far exceeding the national average—they are not likely to change their minds soon.

Mr. Hood is chairman and president of the John Locke Foundation, a public-policy think tank based in Raleigh, N.C.